London clings on after three day free fall

London's stock market clung on to the slimmest of gains last night, finally hitting positive territory after three days of plunging share prices that saw £18bn wiped off the value of UK pension funds.

After the biggest week of market chaos since May 2006, when fears about inflation unsettled markets, the FTSE 100 benchmark index rose a mere 0.2 points to 6116.2 - but still 4.5pc down on the week. But traders remained cautious and warned that next week could be just as torrid.

The improvement came after one of the Federal Reserve's chief members downplayed a recession warning delivered by former Fed chairman Alan Greenspan earlier in the week. William Poole, chairman of the Federal Reserve Bank of St. Louis, said: "We do not see a recession coming.

"Our commitment in the Federal Reserve is to do what is necessary to respond to events if they unfold and require a response. But at this point it seems to me there is no, in my judgement, pressing need for any immediate action."

On Tuesday Mr Greenspan spooked the markets by warning that a US recession could be possible later this year.

Related Articles

The warning coincided with a near 9pc plunge in Chinese share prices, triggering the sell-off in markets around the world.

The Dow continued to lose ground yesterday, and was at 12159.80 in mid-afternoon trading. Mr Poole said the reasons for the slump this week remained something of a mystery. "We don't see the accumulating evidence that would justify ongoing market declines," he said.

But traders put the slumps down to a cocktail of conditions which has been brewing over recent months, with rising share prices and increased risk-taking building up a bubble, and the prospect of a US or Chinese slowdown or military action against Iran helping prick it.

Others fear that the so-called carry trade, in which investors have been borrowing at cheap rates in countries including Japan and then selling on their amassed yen to buy other assets, is unwinding.

As currency markets continued to exhale yesterday, the pound dropped by more than a cent and a half against the dollar to $1.9442. The yen, meanwhile, has recorded its biggest weekly gain for over a year.

Only a slim minority of strategists think the recent plunges in equity prices will last much longer than a few weeks, after which they think stocks will bounce back.

Analysis by Aon Consulting showed that the plunge in equities and the related movements on the money markets cost UK pension funds a total of £18bn - the biggest weekly fall since comparable records began six years ago.